[ Provisional Translation ]

Views on the Revision of the Bank of Japan Law

[ Summary / Full Text ]

September 17, 1996

Preface

1. The financial system is comprised of an infrastructure of economic activities. Construction of a free and vigorous financial market and a financial system which is trusted domestically and abroad are indispensable to the wholesome development of the Japanese economy. Recently however, Japan's financial market has been undergoing a "hollowing out" effect and due to such problems as the bad loan issue, the domestic and overseas trust in the Japanese financial system has been shaken. For this reason, it is essential to promote drastic abolition and relaxation of regulations in the area of finance to reconstruct the financial market and strengthen competitiveness based on market principles and the principle of self-responsibility, and to reform the financial system accordingly. These are also pressing needs for securing the competitiveness of Japanese industries.

   From such a viewpoint, Keidanren has compiled the proposals "Measures for Preventing the Hollowing Out of the Financial and Capital Markets to Activate Japanese Industries" (May 1996), "A Proposal for a Deregulation Promotion Plan for Japan" (November 1994) and "Proposals for the Annual Revision of the Regulatory Action Program" (October 1995) and has worked to achieve the outlined objectives. In the future also, we will continue to promote reforms of the financial system in general from the standpoint of the business world in such ways as through further deregulations, review of government sector financing and investment, and reform of financial regulations, for achievement of a free, fair, transparent, and internationally compatible financial system.

2. The issue of revising the Bank of Japan Law that The Central Bank Study Group(Prime Minister Hashimoto's private advisory group) is examining should be positioned as an important means of reforming the financial system. Reforming the system of the BOJ, an organization which plays a role in establishing financial policies and stabilizing the financial system, is a matter of great interest not just for the financial world but for the entire industrial world as well.

   As is clear from the experience of prices volatility in the 1970s and the "bubble economy" in the latter 1980s, once hyper inflation or a bubble economy emerges, appropriate distribution of resources is prevented, and industrial activity and the actual economy are seriously affected. Also, when the stability of the financial system is shaken, smooth fund-raising by enterprises is hampered.

   Japanese economy is now finally recovering from the after-effects of the bubble economy. Keidanren believes that now is the time, based on past experiences, to examine what the central bank system should look like in consideration of opinions of the industrial world and international trends while dealing with the issues of achieving inflation-free sustainable growth and stabilizing the financial system. We have therefore compiled our position regarding the issue of reforming the Bank of Japan Law as follows.

   It is needless to say that the reform of the financial system can not be completed merely by revising the Bank of Japan Law. Particularly regarding financial regulations there is a strong need to convert from a protective control administration to a highly transparent administration by eliminating discretionary authority and to establish administrative accountability (responsibility to explain). To achieving these objectives, it is necessary to examine such issues as what the administrative organization should be. Following the issue of revising the Bank of Japan Law, Keidanren will promote deeper discussions into the issue of reforming financial administrations.

Views on the Revision of the Bank of Japan Law

Basic Viewpoint for the Revision

1. As "transparency" of the financial system as a whole is being required, it will be necessary to review and reform the central bank system to make easy to understand from Japan and abroad. It will be necessary to eliminate the wide gap existing between the legal system established on the war structure (1942) and the actual conditions and to clarify BOJ's authority and accountability.

2. Due to financial deregulation and internationalization in Japan and abroad, the diverse aspects of the financial system are expected to harmonize with the global standards. The central bank system is also expected to ensure compatibility with the systems of other countries.

Role to be Played by the Bank of Japan

Based on the fact that the BOJ plays an important role in supporting the wholesome development of the Japanese economy from a financial aspect, the following points should be clarified.
1. First, achievement of price stability should be aimed for.

2. Secondly, the BOJ should play the role of stabilizing the settlement system. Hence, its role should be to avoid systemic risks through such means as the stable operation of the settlement system. Its roles should be distinguished from those of the administrative authorities which include supervising and guiding financial institutions from the viewpoint of securing the wholesome operation of individual financial institutions and the protection of depositors.
   Since last year, the BOJ has been extending external credits as a lender of last resort. In order to avoid easy dependence on such credits, it will be necessary to prescribe clear standards. On this basis, it will be necessary to make a system under which such credits can be extended ,if necessary, by close contact and consultation with the administrative authorities, and based on the decision of the BOJ.

Bank of Japan's Independence, Accountability, and Reporting Obligations

1. The present Bank of Japan Law prescribes that basic decisions related to financial policies (such as modification of the official discount rate) are to be made exclusively by the BOJ Policy Board. However, because the Finance Minister's right to instruct the BOJ and the right of the Cabinet and the Finance Minister to dismiss BOJ executives are clearly prescribed, it cannot be said that BOJ's legal independence has been secured.
   There are some who believe that BOJ's independence has in actuality been secured. However, if legal independence is not secured for certain, there is a concern that speculations and statements not related to the BOJ will affect the market, making it difficult for the BOJ to execute financial policies.
   In recent years in other countries, systems are being revised strengthen the independence of central banks.
   For these reasons, it will be necessary to secure the legal independence of the BOJ to prevent hindrances to the execution of its missions. (Specifically, one method is to eliminate the Finance Minister's rights to give instructions to the BOJ and dismiss its officials).
   The BOJ should also be given the capacity to autonomously implement the central bank's ordinary international financial transactions and operations at its own discretion.

2. In addition to strengthening BOJ's independence, it will be necessary to improve the "transparency" of policies, strengthen accountability, and ensure compatibility with overall economic policy.
   1. Strengthening of BOJ's reporting obligations and the system of accountability
      At present, the BOJ is submits an "Bank of Japan Annual Review" to the Diet every year via the Ministry of Finance. In addition, it will be necessary to take measures so that the appropriateness of the policies can be examined after the fact by having the BOJ provide full explanation of its policy management. It is also necessary to establish a Diet committee to be in charge of financial issues (in the United States, the Senate and the House of Representatives have banking committees) and to have the BOJ Governor regularly provide systematic reports including his ideas regarding future financial policy management. Such strengthening of accountability will increase people's understanding and trust of BOJ's policies.

   2. Relationship between financial policies and overall economic policies
      Even the independence of the BOJ is strengthened, it will be necessary to ensure compatibility between the BOJ's financial policy management and the government's economic policies.
      In this case, it might be possible to refer to provisions seen in foreign countries such as France and Germany in regards to acknowledging the government's right to submit bills, and requiring the BOJ bear the obligation to execute duties within the framework of the government's general economic policies as long as such does not hamper the central bank from carrying out its duties.

The Supreme Decision-Making Body

1. The present Policy Board should be abolished, and a supreme decision-making body made up of the Governor, other executives, and people in neutral positions with advanced economic and financial knowledge should be established.

2. It will also be necessary to improve transparency and strengthen the system of accountability.
   First, prior to assuming office, the members of the supreme decision-making body should present themselves before a Diet committee, explain their ideas regarding financial policies, and other issues be appointed by the Cabinet upon approval by the Diet.
   It will also be important to make public in some form the contents of the discussions which led to the determination of policy. For example, such as in the United States, the essentials of the proceedings should first be made public, and the entire proceedings should be made public after passage of a certain period of time (five years in the case of the U.S.).

Examination

In view of the recent issue of bad loan, in aiming to stabilize the financial system, it will be necessary to develop clear rules on examination, supervision, and handling of bankruptcy of financial institutions and also the strict application of these rules. In addition to thus achieving transparent financial regulation by eliminating discretionary authority, it will also be necessary for the BOJ to play its own role to avoid systemic risks by clarifying how its duties are different from administrative examination.
It is essential that financial institutions make full disclosure; and their internal rules and checking systems should be strengthened to enrich the institutions' self-examination and external audit systems, as preconditions for achieving this purpose.
1. The present examination by the BOJ is carried out through contracts with individual financial institutions, the legal position of which is unclear. However, as long as the BOJ plays a role in stabilizing the settlement system, separately from administrative examination and supervision, examination that is open in nature is necessary. Examination by the BOJ of financial institutions that it has transactions with should clearly be stipulated in the Bank of Japan Law. When such examination is made legal, the BOJ officials will as a matter of course bear the obligation to maintain secrecy. However, the objective of the examination by the BOJ should be limited to avoidance of systemic risks.

2. So as to minimize the clerical burden on the financial institutions due to redundancy between administrative and BOJ examination, and ensure effective and efficient examination, differentiation of examination and examination intervals according to the rating of the financial institution, coordination and cooperation with administrative examination, and sharing of data should be promoted.

Conclusion

We have thus far made proposals regarding how to revise the Bank of Japan Law. These however are merely designed to develop the environment for the BOJ to play the role expected of it. It is only when the BOJ makes efforts to more accurately judge the situation and properly decide and execute policies that it will be truly trusted both in Japan and abroad. It will also be necessary for the Diet not just to reform the organization by establishing a committee on financial issues, but to develop a system so that committee members can become well informed of the financial issues and carry out substantial discussions. We believe that only when this is achieved along with the legal changes, can true reform of the central bank be achieved.